10-QPeriod: Q1 FY2006

Fidelity National Information Services, Inc. Quarterly Report for Q1 Ended Mar 31, 2006

Filed May 10, 2006For Securities:FIS

Summary

Fidelity National Information Services, Inc. (FIS) reported strong revenue growth in the first quarter of 2006, largely driven by the significant merger with Certegy, Inc. completed on February 1, 2006. This strategic acquisition has expanded FIS's market position and product offerings in the financial services technology sector. While the merger contributed substantially to the top line, it also led to increased operating expenses, including higher amortization costs related to purchase accounting and increased stock-based compensation. Consequently, net earnings decreased year-over-year, and gross profit margins saw a slight decline due to the integration of Certegy's business, which typically operates with lower margins. The company also highlighted continued investment in its core segments, Transaction Processing Services (TPS) and Lender Processing Services (LPS), with focus on enhancing its mortgage servicing platform and core banking software. Liquidity remains a key focus, with substantial long-term debt stemming from the recapitalization in March 2005, but the company anticipates sufficient cash flow from operations to manage its obligations. Investors should monitor the integration progress of the Certegy merger and its impact on margins and synergies, as well as the company's leverage and debt management.

Key Highlights

  • 1Total revenues increased by 38.3% to $900.9 million for the three months ended March 31, 2006, primarily due to the acquisition of Certegy, Inc.
  • 2The company reported net earnings of $39.4 million for the quarter, a decrease from $44.6 million in the prior year period, impacted by increased expenses related to the Certegy merger and stock-based compensation.
  • 3Gross profit as a percentage of revenues decreased to 30.9% from 34.0% year-over-year, attributed to the integration of Certegy's lower-margin business and purchase accounting amortization.
  • 4Selling, general, and administrative expenses increased significantly to $145.7 million from $110.6 million, largely due to a substantial rise in stock-based compensation expense.
  • 5Long-term debt increased to $2.9 billion as of March 31, 2006, reflecting borrowings from the March 2005 recapitalization.
  • 6The company has a significant amount of goodwill ($3.7 billion) and intangible assets ($1.1 billion) on its balance sheet, primarily resulting from recent acquisitions.
  • 7A significant strategic development is the announced plan to eliminate Fidelity National Financial's (FNF) holding company structure, which would involve FNF merging into FIS, pending regulatory and shareholder approvals.

Frequently Asked Questions

The primary driver of the substantial revenue increase to $900.9 million was the completion of the merger with Certegy, Inc. on February 1, 2006. This acquisition significantly expanded FIS's operations and customer base.

While the Certegy merger significantly boosted revenues, it also led to increased operating expenses, including amortization from purchase accounting and higher stock-based compensation. This resulted in a decrease in net earnings to $39.4 million for the quarter compared to $44.6 million in the prior year period, and a reduction in gross profit margin.

FIS has a substantial long-term debt balance of approximately $2.9 billion as of March 31, 2006, primarily due to the recapitalization completed in March 2005. The company expects cash flows from operations to be sufficient to cover operating needs and debt service, and it utilizes interest rate swaps to hedge against variable interest rate fluctuations on a portion of its debt.

Yes, Fidelity National Financial (FNF), the parent company, announced plans to eliminate its holding company structure, which would involve FNF merging into FIS. If approved and completed, this would lead to a significant restructuring and potential synergies.